RBS to create $61 billion bad bank, accelerate Citizens sale

By Gavin Finch and Svenja O’DonnellBloomberg News

Royal Bank of Scotland Group Plc expects to post a “substantial” full-year loss after transferring 38.3 billion pounds ($61 billion) of its worst loans to an internal bad bank under government pressure.

RBS to create $61 billion bad bank, accelerate Citizens sale

ROYAL BANK OF SCOTLAND Group Plc will set up an internal bad bank to include 38 billion pounds ($61 billion) in toxic assets after U.K. Chancellor of the Exchequer George Osborne opted against a full breakup. The bank expects to post a “substantial” full-year loss on setting up the bad bank, RBS said in a statement Friday, and will accelerate plans to sell Providence-based Citizens Financial Group Inc. unit to bolster capital.

LONDON – Royal Bank of Scotland Group Plc expects to post a “substantial” full-year loss after transferring 38.3 billion pounds ($61 billion) of its worst loans to an internal bad bank under government pressure.

Britain’s biggest publicly owned lender expects to log as much as 4.5 billion pounds of writedowns in the fourth quarter as it starts to sell the loans, Edinburgh-based RBS said in a statement Friday. It will also speed up plans to sell its Providence-based Citizens Financial Group Inc. unit to bolster capital.

Chancellor of the Exchequer George Osborne is trying to recoup some of the cost of RBS’s 45.5 billion-pound bailout, the biggest bank rescue in the world. He started a review in June to consider whether the bank should be broken up. While the government has been able to start reducing its stake in Lloyds Banking Group Plc, RBS has been hobbled by souring loans and past regulatory mis-steps, making a sale before an election due in 18 months “unlikely,” according to Osborne.

“We may have avoided the worst excesses of a full blown good bank/bad bank split, but you are getting a lot of the medicine in the form of accelerated loss recognition as assets are manged for speed and not value,” said Ian Gordon, an analyst at Investec Ltd. in London, who rates the bank a sell. “A lot of shareholder value is being destroyed.”

The stock fell fell 4.3 percent to 351.70 pence as of 10:29 a.m. in London. That’s below the 407-pence price at which the government would break even on its 81 percent stake. By contrast, Lloyds, which received a 20 billion-pound rescue during the crisis, has increased 61 percent this year, allowing the government to sell a 3.2 billion-pound stake in September. Osborne told BBC Radio Friday he hopes to sell more Lloyds shares in 2014.

‘British taxpayer’

“RBS will deal decisively with the problems of the past by separating out the good from the bad,” Osborne said in a statement. “It means less exposure for the British taxpayer.”

RBS will sell or run down 55 percent to 70 percent of the bad bank’s assets in the next two years and the rest within three. That timetable “must be aggressive for RBS to put its troubles behind it,” Sajid Javid, financial secretary to the Treasury, said in an interview with Bloomberg Television’s Francine Lacqua and Manus Cranny Friday.

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